Interest rates have remained the same for several years. The Federal Reserve has sent signals that this will come to an end and they may raise interest rates. This did not happen at the last Federal Reserve board meeting. Current indications are the Federal Reserve will raise rates at the next meeting. Markets reacted favorably that rates did not increase at the last Fed meeting. The Market full expects the Federal Reserve will raise rates during the next meeting and is reacting to it as a certainty.
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If the Federal Reserve does not raise rates, the Markets may believe that the Federal Reserve has lost it’s way and it’s nerve to do what is necessary. Raising rates have always been thought to be a hedge against inflation. Inflation fears have been the biggest reason for the call to raise rates. Banks have not been able to pay deposit holders any kind of rate for deposited funds. This is another reason to raise rates.
Many economists have predicted that interest rates will rise. If the government does not meet the August 2nd deadline and raises the debt ceiling, the vast majority of serious economists predict that interest rates will certainly rise, almost immediately, a significant amount, with further increases as the weeks and months go by.
A default for a few days are assured to rattle markets. Indexes to go down. Nervous businesses will certainly delay a majority of hiring due to economic uncertainty. This is a major factor that will trigger economic slowdown.
Standard and Poors, S & P, previously had announced that if the government does not come up with a deal, they will downgrade the U.S. AAA bond rating. This will certainly trigger a rise in rates. Treasury will be forced to raise rates to attract the same level of foreign investment, now offering a less credit worthy investment.
For current updates, you can visit planet money for in depth stories.